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Loans Receivable, Net and Related Allowance for Credit Losses

3 Months Ended

Dec. 31, 2023

LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR CREDIT LOSSES

NOTE J – LOANS RECEIVABLE, NET AND RELATED ALLOWANCE FOR CREDIT LOSSES

Loans receivable, net were comprised of the following:

	December 31,			September 30,
	2023			2023
	(In thousands)

One-to-four family residential	$	234,156		$	237,683
Commercial real estate		407,346			389,134
Construction and land		34,641			21,853
Home equity loans and lines of credit		24,069			16,983
Commercial business		27,043			30,194
Other		2,239			2,359
Total loans receivable		729,494			698,206
Net deferred loan costs		(934	)		(806	)
Total loans receivable, net	$	728,560		$	697,400

The segments of the Company’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The residential mortgage loan segment is further disaggregated into two classes: first lien, amortizing term loans, and the combination of second lien amortizing term loans and home equity lines of credit. The commercial loan segment is further disaggregated into three classes: loans secured by multifamily structures, loans secured by owner-occupied commercial structures, and loans secured by non-owner occupied nonresidential properties. The construction loan segment consists primarily of developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures and to a lesser extent one-to-four family residential construction loans made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. Construction loans to developers and investors have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the loan. The commercial business loan segment consists of loans made for the purpose of financing the activities of commercial customers and consists of revolving lines of credit and loans partially guaranteed by the U.S. Small Business Administration. The consumer loan segment consists primarily of stock-secured installment loans, but also includes unsecured personal loans and overdraft lines of credit connected with customer deposit accounts.

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. All loans greater than three months past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as severe delinquency, bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Company’s Asset Review Committee performs monthly reviews of all commercial relationships internally rated 6 (“Watch”) or worse. Confirmation of the appropriate risk grade is performed by an external loan review company that semi-annually reviews and assesses loans within the portfolio. Generally, the external consultant reviews commercial relationships greater than $500,000 and/or criticized relationships greater than $250,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a monthly basis.

The following table presents the classes of the loan portfolio by origination year summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful for loans subject to the Company’s internal risk rating system and by performing status for all other loans as of December 31, 2023.

													Revolving Loans
	December 31, 2023												Amortized		Converted
	Term Loans Amortized Cost Basis by Origination Fiscal Year												Cost Basis		to Term		Total
	2024		2023		2022		2021		2020		Prior
	(In thousands)
One-to-four family residential
Performing	$	7,180	$	43,224	$	33,060	$	27,899	$	31,288	$	91,353	$	—	$	—	$	234,004
Non-performing		—		—		—		—		—		152		—		—		152
Total	$	7,180	$	43,224	$	33,060	$	27,899	$	31,288	$	91,505	$	—	$	—	$	234,156
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Commercial real estate
Pass	$	18,235	$	82,558	$	68,224	$	66,529	$	30,007	$	131,540	$	6,373	$	1,540	$	405,006
Special Mention		—		—		—		—		—		116		—		—		116
Substandard		—		—		2,224		—		—		—		—		—		2,224
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	18,235	$	82,558	$	70,448	$	66,529	$	30,007	$	131,656	$	6,373	$	1,540	$	407,346
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Construction and land
Pass	$	10,368	$	12,297	$	2,351	$	—	$	1,761	$	4,665	$	725	$	—	$	32,167
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		2,474		—		—		2,474
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	10,368	$	12,297	$	2,351	$	—	$	1,761	$	7,139	$	725	$	—	$	34,641
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Home equity loans and lines of credit
Performing	$	724	$	1,678	$	1,657	$	342	$	277	$	1,438	$	17,953	$	—	$	24,069
Non-performing		—		—		—		—		—		—		—		—		—
Total	$	724	$	1,678	$	1,657	$	342	$	277	$	1,438	$	17,953	$	—	$	24,069
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Commercial business
Pass	$	1,030	$	542	$	2,685	$	2,047	$	946	$	3,390	$	16,403	$	—	$	27,043
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	1,030	$	542	$	2,685	$	2,047	$	946	$	3,390	$	16,403	$	—	$	27,043
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Other
Performing	$	—	$	—	$	65	$	1	$	13	$	1,793	$	367	$	—	$	2,239
Non-performing		—		—		—		—		—		—		—		—		—
Total	$	—	$	—	$	65	$	1	$	13	$	1,793	$	367	$	—	$	2,239
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Information presented in the table above is not required for periods prior to the adoption of ASU 2016-13. The following table presents more comparable information of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the Bank’s internal risk rating system as of September 30, 2023.

			Special
	Pass		Mention		Substandard		Doubtful		Total
	(In thousands)
September 30, 2023
One-to-four family residential	$	236,876	$	—	$	807	$	—	$	237,683
Commercial real estate		386,794		116		2,224		—		389,134
Construction		19,379		—		2,474		—		21,853
Home equity lines of credit		16,983		—		—		—		16,983
Commercial business		30,194		—		—		—		30,194
Other		2,359		—		—		—		2,359
Total	$	692,585	$	116	$	5,505	$	—	$	698,206

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The Bank was not accruing interest on any loans delinquent greater than 90 days. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans for the periods presented:

			30-59		60-89
			Days		Days		90 Days +		Total
	Current		Past Due		Past Due		Past Due		Loans
	(In thousands)
December 31, 2023
One-to-four family residential	$	232,710	$	1,056	$	238	$	152	$	234,156
Commercial real estate		404,315		690		116		2,225		407,346
Construction		32,167		—		—		2,474		34,641
Home equity lines of credit		24,069		—		—		—		24,069
Commercial business		26,404		639		—		—		27,043
Other		2,239		—		—		—		2,239
Total	$	721,904	$	2,385	$	354	$	4,851	$	729,494

			30-59		60-89
			Days		Days		90 Days +		Total
	Current		Past Due		Past Due		Past Due		Loans
	(In thousands)
September 30, 2023
One-to four-family residential	$	236,729	$	—	$	568	$	386	$	237,683
Commercial real estate		386,794		—		116		2,224		389,134
Construction		19,379		—		—		2,474		21,853
Home equity lines of credit		16,983		—		—		—		16,983
Commercial business		30,047		147		—		—		30,194
Other		2,359		—		—		—		2,359
Total	$	692,291	$	147	$	684	$	5,084	$	698,206

The following tables present our non-accrual loans and the related allowance for credit loss by loan type as of December 31, 2023 and the non-accrual loans and specific reserves by loan type as of September 30, 2023.

	Non-		Allowance for
	Accrual		Credit Loss
	(In thousands)
December 31, 2023
One-to-four family residential	$	152	$	—
Commercial real estate		2,225		—
Construction and land		2,474		—
Home loans and lines of credit		—		—
Commercial business		—		—
Total	$	4,851	$	—

	Non-		Specific
	Accrual		Reserve
	(In thousands)
September 30, 2023
One-to four-family residential	$	386	$	—
Commercial real estate		2,224		—
Construction and land		2,474		—
Home equity lines of credit		—		—
Commercial business		—		—
Other		—		—
Total	$	5,084	$	—

The following table identifies our non-performing, collateral dependent loans by collateral type as of December 31, 2023:

	December 31,
	2023
	(In thousands)
One- to four-family residential	$	152
Commercial real estate		2,225
Land		2,474
Total	$	4,851

The Company’s adoption of ASU 2016-13 eliminated the requirement to disclose impaired loans. The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2023:

					Impaired
					Loans with
	Impaired Loans with				No Specific
	Specific Allowance				Allowance		Total Impaired Loans
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
	Investment		Allowance		Investment		Investment		Balance
September 30, 2023	(In thousands)

One-to four-family residential	$	—	$	—	$	2,031	$	2,031	$	2,031
Commercial real estate		—		—		2,969		2,969		2,969
Construction		—		—		2,474		2,474		2,539
Commercial business		—		—		147		147		147
Total impaired loans	$	—	$	—	$	7,621	$	7,621	$	7,686

The following table presents the average recorded investment in impaired loans and the interest income recognized on impaired loans for the three months ended December 31, 2022.

	Three Months Ended
	December 31, 2022
	(In thousands)

One-to-four family residential	$	1,447
Commercial real estate		1,269
Construction		2,835
Commercial business		203
Average investment in impaired loans	$	5,754

Interest income recognized on
an accrual basis on impaired loans
One-to-four family residential	$	20
Commercial real estate		13
Commercial business		2
Total	$	35

An allowance for credit losses (“ACL”) is maintained to absorb losses from the loan portfolio. Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ACL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ACL. Since loans individually evaluated for impairment are promptly written down to their fair value, typically there is no portion of the ACL for loans individually evaluated for impairment.

ASU 2016-13 requires estimated credit losses on loans to be determined based on an expected life of loan model, as compared to an incurred loss model (in effect for periods prior to October 1, 2023). Accordingly, the allowance for losses disclosures subsequent to October 1, 2023 are not always comparable to prior dates. In addition, certain new disclosures required under ASU 2016-13 are not applicable to prior periods. As a result, the following tables present disclosures separately for each period, where appropriate. New disclosures required under ASU 2016-13 are only shown for the current period. Please refer to Note B “Summary of Significant Accounting Policies” for a summary of the impact of adopting the provisions of ASU 2016-13 on October 1, 2023.

The following tables set forth the allocation of the Bank’s allowance for credit losses by loan category at the dates indicated. The portion of the credit loss allowance allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total credit loss allowance is a valuation allocation applicable to the entire loan portfolio. The Company generally charges-off the collateral or discounted cash flow deficiency on all loans at 90 days past due and all loans rated substandard or worse that are 90 days past due.

The following table presents, by loan category, the changes in the allowance for credit losses for the three months ended December 31, 2023 and the allowance for loan losses for the three months ended December 31, 2022.

	One-to-Four									Home Equity
	Family			Commercial						Lines of			Commercial
	Residential			Real Estate			Construction			Credit			Business			Other			Unallocated			Total
	(In thousands)

Balance- September 30, 2023	$	1,259		$	5,277		$	472		$	207		$	939		$	2		$	174		$	8,330
Effect of adopting ASU 2016-13		7			(589	)		(55	)		(87	)		(133	)		(1	)		(174	)		(1,032	)
Charge-offs		—			—			—			—			—			—			—			—
Recoveries		—			—			—			—			—			—			—			—
Provision (credit)		(75	)		161			301			(40	)		39			(1	)		—			385
Balance- December 31, 2023	$	1,191		$	4,849		$	718		$	80		$	845		$	—		$	—		$	7,683

Balance- September 30, 2022	$	1,223		$	4,612		$	461		$	263		$	1,484		$	1		$	389		$	8,433
Charge-offs		—			—			—			—			—			—			—			—
Recoveries		—			—			—			—			—			—			—			—
Provision (credit)		12			518			65			(7	)		(109	)		—			(162	)		317
Balance- December 31, 2022	$	1,235		$	5,130		$	526		$	256		$	1,375		$	1		$	227		$	8,750

During the three months ended December 31, 2023 and exclusive of the impact of the adoption of ASU 2016-13, the changes in the provision for credit losses for each portfolio of loans were primarily due to fluctuations in the outstanding balance of each segment of loans collectively evaluated for impairment. Specifically, we experienced significant growth in our commercial real estate and construction loan portfolios during the three months ended December 31, 2023 and a corresponding increase in the provision for credit losses for these portfolios. The overall increase in the allowance during the three months ended December 31, 2023 is attributed to the previously mentioned growth in our commercial real estate and construction portfolios, partially offset by improved economic metrics with continued low levels of net charge-offs and a decrease in non-performing assets.

The following table presents, by loan category, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of and September 30, 2023.

	One-to-Four						Home Equity
	Family		Commercial				Lines of		Commercial
	Residential		Real Estate		Construction		Credit		Business		Other		Unallocated		Total
	(In thousands)
Allowance for Loan Losses:
Balance - September 30, 2023	$	1,259	$	5,277	$	472	$	207	$	939	$	2	$	174	$	8,330
Individually evaluated
for impairment		—		—		—		—		—		—		—		—
Collectively evaluated
for impairment		1,259		5,277		472		207		939		2		174		8,330

Loans receivable:
Balance - September 30, 2023	$	237,683	$	389,134	$	21,853	$	16,983	$	30,194	$	2,359	$	—	$	698,206
Individually evaluated
for impairment		2,031		2,969		2,474		—		147		—		—		7,621
Collectively evaluated
for impairment		235,652		386,165		19,379		16,983		30,047		2,359		—		690,585

During the three months ended December 31, 2023, there were no loans modified to borrowers experiencing financial difficulty. During the three months ended December 31, 2022, there was one loan modified that was identified as a troubled debt restructuring (“TDR”) and there were no TDRs that subsequently defaulted within twelve months of modification.

	Three Months Ended December 31, 2022
	Number of		Investment Before		Investment After
	Loans		TDR Modification		TDR Modification
	(Dollars in thousands)
One-to four-family residential		1	$	97	$	107

Total		1	$	97	$	107

There were no residential loans in the process of foreclosure at December 31, 2023.